SECTION 11. UNIFORM — Internal Revenue Bulletin 2015-5

CAPITALIZATION (UNICAP) METHODS (§ 263A)

.01 Certain uniform capitalization (UNICAP) methods used by resellers and reseller-producers .

(1) Description of change . (a) Applicability . This change applies to:

(i) a small reseller of personal property that wants to change from a permissible UNICAP method to a permissible nonUNICAP inventory capitalization method in any taxable year that it qualifies as a small reseller;

(ii) a formerly small reseller that wants to change from a permissible nonUNICAP inventory capitalization method to a permissible UNICAP method in the first taxable year that it does not qualify as a small reseller;

(iii) a reseller-producer that wants to change from a permissible UNICAP method for both its production and resale activities to a permissible simplified resale method described in § 1.263A–3(d)(3) in any taxable year that it qualifies to use a simplified resale method for both its production and resale activities under § 1.263A–3(a)(4) (resellers with de mini- mis production activities);

(iv) a reseller-producer that wants to change from a permissible simplified re

sale method described in § 1.263A– 3(d)(3) for both its production and resale activities to a permissible UNICAP method for both its production and resale activities in the first taxable year that it does not qualify to use a simplified resale method for both its production and resale activities under § 1.263A–3(a)(4);

(v) a reseller that wants to change its permissible UNICAP method to include a special reseller cost allocation rule;

(vi) a reseller or reseller-producer that wants to change to a UNICAP method (or methods) specifically described in the regulations and includes any necessary changes in the identification of costs subject to § 263A that will be accounted for using the proposed method in any taxable year, other than the first taxable year, that it does not qualify as a small reseller; or

(vii) a reseller or reseller-producer that wants to change from not capitalizing a cost subject to § 263A to capitalizing that cost under a UNICAP method (or methods) specifically described in the regulations that the reseller or reseller-producer is already using.

(b) Inapplicability . (i) Self-constructed assets . This change does not apply to a taxpayer that wants to use either the simplified service cost method or the simplified production method for self-constructed assets under §§ 1.263A–1(h)(2)(i)(D) and 1.263A– 2(b)(2)(i)(D). (ii) Historic absorption ratio . This change does not apply to a taxpayer that wants to make an historic absorption ratio election under §§ 1.263A–2(b)(4) or 1.263A–3(d)(4), or to a taxpayer that wants to revoke an election to use the historic absorption ratio with the simplified resale method ( see § 1.263A– 3(d)(4)(iii)(B)), including a taxpayer using the simplified resale method with an historic absorption ratio that wants to change to a UNICAP method specifically described in the regulations that does not include the historic absorption ratio. However, this change applies to a small reseller that wants to change from the historic absorption ratio with the simplified resale method to a permissible nonUNICAP inventory capitalization method under section 11.01(1)(a)(i) of this revenue procedure.

(iii) Interest capitalization . This change does not apply to a taxpayer that wants to change its method of accounting for interest capitalization.

(iv) Recharacterizing costs under the simplified resale method . This change does not include a change for purposes of recharacterizing “section 471 costs” as “additional § 263A costs” (or vice versa) under the simplified resale method.

(2) Certain eligibility rule inapplica- ble . The eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, does not apply to the changes described in §§ 11.01(1)(a)(i) and (ii) of this revenue procedure.

(3) Definitions . (a) “Reseller” means a taxpayer that acquires real or personal property described in § 1221(a)(1) for resale.

(b) “Small reseller” means a reseller whose average annual gross receipts for the three immediately preceding taxable years (or fewer, if the taxpayer has not been in existence for the three preceding taxable years) do not exceed $10,000,000. See § 263A(b)(2)(B).

(d) “Producer” means a taxpayer that produces real or tangible personal property.

(e) “Reseller-producer” means a taxpayer that is both a producer and a reseller.

(f) “Permissible UNICAP method” means a method of capitalizing costs that is permissible under § 263A.

(g) “A UNICAP method specifically described in the regulations” includes the 90–10 de minimis rule to allocate a mixed service department’s costs to resale activities (§ 1.263A–1(g)(4)(ii)), the 1/3–2/3 rule to allocate labor costs of personnel to purchasing activities (§ 1.263A– 3(c)(3)(ii)(A)), the 90–10 de minimis rule to allocate a dual-function storage facility’s costs to property acquired for resale (§ 1.263A–3(c)(5)(iii)(C)), the specific identification method (§ 1.263A–1(f)(2)), the burden rate method (§ 1.263A– 1(f)(3)), the standard cost method (§ 1.263A–1(f)(3)), the direct reallocation method (§ 1.263A–1(g)(4)(iii)(A)), the step-allocation method (§ 1.263A– 1(g)(4)(iii)(B)), the simplified service cost

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method (§ 1.263A–1(h)) (with a laborbased allocation ratio), and the simplified resale method without the historic absorption ratio election (§ 1.263A–3(d)), but does not include any other reasonable allocation method within the meaning of § 1.263A–1(f)(4).

(h) “Special reseller cost allocation rule” means the 90–10 de minimis rule to allocate a mixed service department’s costs to property acquired for resale (§ 1.263A–1(g)(4)(ii)), the 1/3 - 2/3 rule to allocate labor costs of personnel to purchasing activities (§ 1.263A–3(c)(3)(ii)(A)), and the 90–10 de minimis rule to allocate a dual-function storage facility’s costs to property acquired for resale (§ 1.263A– 3(c)(5)(iii)(C)). (i) “Permissible non-UNICAP inventory capitalization method” means a method of capitalizing inventory costs that is permissible under § 471.

(4) Section 481(a) adjustment period . Beginning with the year of change, a taxpayer changing its method of accounting for costs pursuant to sections 11.01(1)(a)(i), 11.01(1)(a)(iii), or 11.01(1)(a)(iv) of this revenue procedure generally must take any applicable net positive § 481(a) adjustment for such change into account ratably over the same number of taxable years, not to exceed four, that the taxpayer used its former method of accounting. A taxpayer changing its method of accounting for costs pursuant to sections 11.01(1)(a)(ii), 11.01(1)(a)(v), or 11.01(1)(a)(vi) of this revenue procedure must take any applicable net positive § 481(a) adjustment for such change into account as provided in section 7.03 of Rev. Proc. 2015–13.

(5) Multiple changes . A taxpayer making both this change and another change in method of accounting for the same year of change must comply with the ordering rules of § 1.263A–7(b)(2).

(6) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 11.01 is “22.” (7) Example . The following example illustrates the principles of this section 11.01 for small resellers and formerly small resellers.

Assume X, a corporate reseller of personal property, incorporated January 2, 2005, adopted a taxable

year ending December 31. In determining whether X is a small reseller, as provided in section 11.01(3)(b) of this revenue procedure, X calculates its average annual gross receipts for the three taxable years (or fewer, if applicable) immediately preceding the taxable year being analyzed. For each of the taxable years 2005 through 2014, X calculates the corresponding average annual gross receipts for the three immediately preceding taxable years (or fewer, if applicable). The results are shown in the table below:

Average Annual Gross

2005 $ 0

2006 5,000,000

2007 6,000,000

2008 7,000,000

2009 11,000,000

2010 11,000,000

2011 9,000,000

2012 8,000,000

2013 11,000,000

2014 12,000,000

Furthermore, X which adopted the dollarvalue LIFO inventory method, has the following LIFO inventory balances determined without considering the effects of the UNICAP method:

Beginning Ending

2009 $1,000,000 $1,100,000

2010 1,100,000 1,200,000

2011 1,200,000 1,300,000

2012 1,300,000 1,400,000

2013 1,400,000 1,500,000

2014 1,500,000 1,600,000

X was required by § 263A to change to the UNICAP method for 2009 because its average annual gross receipts for the three taxable years immediately preceding 2009 were $11,000,000, which exceeded the $10,000,000 ceiling permitted by the small reseller exception. Assume that X was required to capitalize $80,000 of “additional § 263A costs” to the cost of its 2009 beginning inventory because of this change in inventory method. In addition, X was required to include one-fourth of the § 481(a) adjustment when computing taxable income for each of the four tax

Current Taxable

Year

Receipts for the Three Taxable Years Immediately Preceding the Current Taxable Year

able years beginning with 2009. Thus, X was required to include a $20,000 positive § 481(a) adjustment in its 2009 taxable income.

X elected to use the simplified resale method without an historic absorption ratio election under § 1.263A–3(d)(3) for determining the amount of additional § 263A costs to be capitalized to each LIFO layer. Assume that X was required to add $10,000 of additional § 263A costs to the cost of its 2009 ending inventory because of the $100,000 increment for 2009. X ’s 2009 Ending Inventory:

Beginning Inventory (Without UNICAP costs) $1,000,000

2009 Increment 100,000

Additional § 263A Costs in Beginning Inventory 80,000

Additional § 263A Costs in 2009 Increment 10,000

Total 2009 Ending Inventory $1,190,000

X ’s Unamortized 2009 § 481(a) Adjustment:

2009 § 481(a) Adjustment $80,000

Amount included in 2009 Taxable Income �20,000�

Unamortized 2009 § 481(a) Adjustment—12/31/09 $60,000

Because X failed to satisfy the small reseller exception for 2010, X was required to continue using the UNICAP method for its inventory costs. Furthermore, X was required to include $20,000 of the unamortized 2009 positive § 481(a) adjustment in 2010 taxable income. Assume that X was required to add $10,000 of additional § 263A costs to the cost of its 2010 ending inventory because of the $100,000 increment for 2010.

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X ’s 2010 Ending Inventory:

Beginning Inventory (With UNICAP costs) $1,190,000

2010 Increment 100,000

Additional § 263A Costs in 2010 Increment 10,000

Total 2010 Ending Inventory $1,300,000

X ’s Unamortized 2009 § 481(a) Adjustment:

Unamortized 2009 § 481(a) Adjustment—12/31/09 $60,000

Amount Included in 2010 Taxable Income �20,000�

Unamortized 2009 § 481(a) Adjustment—12/31/10 $40,000

Because X satisfied the small reseller exception for 2011, X may change voluntarily from the UNICAP method to a permissible non-UNICAP inventory capitalization method (such a change for a current taxable year is provided in section 11.01 of this revenue procedure). To reflect the removal of the additional § 263A costs from the cost of its 2011 beginning inventory, X must compute a corresponding § 481(a) adjustment, which is a negative $100,000 ($1,200,000–$1,300,000). The entire amount of this negative § 481(a) adjustment is included in the computation of X ’s taxable income for 2011. In addition, X must include $20,000 of the unamortized 2009 § 481(a) adjustment in 2011 taxable income.

X ’s 2011 Ending Inventory:

Beginning Inventory (With UNICAP costs) $1,300,000

2011 Increment 100,000

2011 § 481(a) Adjustment �Negative� �100,000�

Total 2011 Ending Inventory $1,300,000

X ’s Unamortized 2009 § 481(a) Adjustment:

Unamortized 2009 § 481(a) Adjustment—12/31/10 $40,000

Amount included in 2011 Taxable Income �20,000�

Unamortized 2009 § 481(a) Adjustment—12/31/11 $20,000

X ’s Unamortized 2011 § 481(a) Adjustment:

2011 § 481(a) Adjustment �Negative� $�100,000�

Amount included in 2011 Taxable Income 100,000

Unamortized 2011 § 481(a) Adjustment—12/31/11 $ 0

X also satisfies the small reseller exception for 2012 and, therefore, is not required to return to the UNICAP method for 2012. X, however, must include $20,000 of the unamortized 2009 positive § 481(a) adjustment in its 2012 taxable income.

X ’s 2012 Ending Inventory:

Beginning Inventory (Without UNICAP costs) $1,300,000

2012 Increment 100,000

Total 2012 Ending Inventory $1,400,000

X ’s Unamortized 2009 § 481(a) Adjustment:

Unamortized 2009 § 481(a) Adjustment—12/31/11 $20,000

Amount in 2012 Taxable Income �20,000�

Unamortized 2009 § 481(a) Adjustment—12/31/12 $ 0

In 2013, X fails to satisfy the small reseller exception and, therefore, must return to the UNICAP method (such a change for a current taxable year is provided in section 11.01 of this revenue procedure). X changes to the simplified

resale method without a historic absorption ratio election under § 1.263A– 3(d)(3). Assume that X must capitalize $120,000 of additional § 263A costs to the cost of its 2013 beginning inventory because of this change in inventory method. Because X used a non-UNICAP method for two taxable years prior to 2013, the § 481 spread period for the positive §481(a) adjustment is two years. Therefore, X must include onehalf of the § 481(a) adjustment ($60,000) when computing taxable income for 2013 and 2014. Assume that X must add $10,000 of additional § 263A costs to the cost of its 2013 ending inventory because of the $100,000 increment for 2013.

X ’s 2013 Ending Inventory:

Beginning Inventory (Without UNICAP costs) $1,400,000

2013 Increment 100,000

Additional § 263A costs in Beginning Inventory 120,000

Additional § 263A costs in 2013 Increment 10,000

Total 2013 Ending Inventory $1,630,000

X ’s Unamortized 2013 § 481(a) Adjustment:

2013 § 481 Adjustment $ 120,000

Amount included in 2013 Taxable Income �60,000�

Unamortized 2013 § 481(a) Adjustment—12/31/13 $ 60,000

Because X fails to satisfy the small reseller exception for 2014, X must continue using the UNICAP method for its inventory costs. Furthermore, X is required to include $60,000 of the unamortized 2013 positive § 481(a) adjustment in 2014 taxable income. Assume that X is required to add $10,000 of additional § 263A costs to the cost of its 2014 ending inventory because of the $100,000 increment for 2014.

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X ’s 2014 Ending Inventory:

Beginning Inventory (With UNICAP costs) $1,630,000

2014 Increment 100,000

Additional § 263A Costs in 2014 Increment 10,000

Total 2014 Ending Inventory $1,740,000

X ’s unamortized 2013 § 481(a) adjustment:

Unamortized 2013 § 481(a) Adjustment—12/31/13 $ 60,000

Amount included in 2014 Taxable Income �60,000�

Unamortized 2013 § 481(a) Adjustment—12/31/14 $ 0

(8) Contact information . For further information regarding a change under this section, contact Christopher W. Call, at (202) 317-7007 (not a toll-free number).

.02 Certain uniform capitalization (UNICAP) methods used by producers and reseller-producers .

(1) Description of change . (a) Applicability . This change applies to a producer (as defined in section 11.01(3)(d) of this revenue procedure) or a reseller-producer (as defined in section 11.01(3)(e) of this revenue procedure) that wants to change to a UNICAP method (or methods) specifically described in the regulations, including any necessary changes in the identification of costs subject to § 263A that will be accounted for using the proposed method. This change also includes a change from not capitalizing a cost subject to § 263A to capitalizing that cost for a producer or a reseller-producer under a UNICAP method (or methods) specifically described in the regulations that the producer or reseller-producer is already using.

wants to make an historic absorption ratio election under §§ 1.263A–2(b)(4) or 1.263A–3(d)(4), or to a taxpayer that wants to revoke an election to use the historic absorption ratio with the simplified production method ( see § 1.263A– 2(b)(4)(iii)(B)), including a taxpayer using the simplified production method with an historic absorption ratio changing to a UNICAP method specifically described in the regulations that does not include the historic absorption ratio.

(iii) Interest capitalization . This change does not apply to a taxpayer that wants to change its method of accounting for interest capitalization.

(iv) Recharacterizing costs under the simplified production method . This change does not include a change for purposes of recharacterizing “section 471 costs” as “additional § 263A costs” (or vice versa ) under the simplified production method.

(2) Definition . A “UNICAP method specifically described in the regulations” includes the 90–10 de minimis rule to allocate a mixed service department’s costs to production or resale activities (§ 1.263A–1(g)(4)(ii)), the 1/3 - 2/3 rule to allocate labor costs of personnel to purchasing activities (§ 1.263A–3(c)(3)(ii)(A)), the 90–10 de minimis rule to allocate a dual-function storage facility’s costs to property acquired for resale (§ 1.263A– 3(c)(5)(iii)(C)), the specific identification method (§ 1.263A–1(f)(2)), the burden rate method (§ 1.263A–1(f)(3)), the standard cost method (§ 1.263A–1(f)(3)), the direct reallocation method (§ 1.263A– 1(g)(4)(iii)(A)), the step-allocation method (§ 1.263A–1(g)(4)(iii)(B)), the simplified service cost method (§ 1.263– 1(h)) (with either a labor-based allocation ratio or a production cost allocation ratio), and the simplified production method without the historic absorption ratio election (§ 1.263A–2(b)), but does not include any other reasonable allocation method within the meaning of § 1.263A–1(f)(4).

(3) Multiple changes . A taxpayer making both this change and another change in method of accounting in the same year of change must comply with the ordering rules of § 1.263A–7(b)(2).

(4) Designated automatic accounting method change number . The designated

automatic accounting method change number for a change under this section 11.02 is “23.” (5) Contact information . For further information regarding a change under this section, contact Neville R. Jiang, at (202) 317-7007 (not a toll-free number). .03 Reserved . .04 Impact fees . (1) Description of change . This change applies to a taxpayer that incurs impact fees as defined in Rev. Rul. 2002–9, 2002–1 C.B. 614, in connection with the construction of a new residential rental building that wants to capitalize the costs to the building under §§ 263(a) and 263A. See Rev. Rul. 2002–9 for further information.

(2) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 11.04 is “25.” (3) Contact information . For further information regarding a change under this section, contact Neville R. Jiang at (202) 317-7007 (not a toll-free number). .05 Change to capitalizing environ- mental remediation costs under § 263A .

(1) Description of change . This change applies to a taxpayer that wants to change its method of accounting for environmental remediation costs from a method that does not comply with the holding in Rev. Rul. 2004–18, 2004–1 C.B. 509, to capitalizing them to inventory under § 263A.

(2) Concurrent automatic changes . A taxpayer making both this change and another automatic change under § 263A for the same year of change may file a single Form 3115 for both changes, provided the taxpayer enters the designated automatic change numbers for both changes on the appropriate line on that Form 3115, and complies with the ordering rules of § 1.263A–7(b)(2). See section 6.03(1)(b) of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, for information on making concurrent changes.

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 11.05 is “77.” (4) Contact information . For further information regarding a change under this

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section, contact John Roman Faron at (202) 317-7005 (not a toll-free number).

.06 Change in allocating environmen- tal remediation costs under § 263A .

(1) Description of change . This change applies to a taxpayer that capitalizes environmental remediation costs to inventory under § 263A, but allocates these costs to inventory using a method of accounting that does not comply with the holding in Rev. Rul. 2005–42, 2005–2 C.B. 67, and wants to change to allocating these costs to inventory produced during the taxable year in which the costs are incurred under § 263A. See Rev. Rul. 2005–42 for further information.

(2) Concurrent automatic changes . A taxpayer making both this change and another automatic change under § 263A for the same year of change may file a single Form 3115 for both changes, provided the taxpayer enters the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115, and complies with the ordering rules of § 1.263A–7(b)(2). See section 6.03(1)(b) of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, for information on making concurrent changes.

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 11.06 is “92.” (4) Contact information . For further information regarding a change under this section, contact John Roman Faron at (202) 317-7005 (not a toll-free number).

.07 Safe harbor methods under § 263A for certain dealerships of motor vehicles .

(1) Description of change . This change applies to a motor vehicle dealership, as defined in section 4 of Rev. Proc. 2010– 44, 2010–49 I.R.B. 811, that is within the scope of section 3 of Rev. Proc. 2010–44 and wants to change its method of accounting to (1) treat its sales facility as a retail sales facility or (2) be treated as a reseller without production activities, as described in section 5 of Rev. Proc. 2010– 44. A motor vehicle dealership that wants to make an automatic change in method of accounting to use one or both safe harbor methods described in section 5 of Rev. Proc. 2010–44 may make any corresponding changes in the identification of costs subject to § 263A that will be ac

counted for using the proposed method (for example, to remove internal profit from inventory costs) or to no longer include negative amounts as additional § 263A costs in the numerator of the simplified resale method formula or the simplified production method formula. However, except as provided in the preceding sentence, a change under this section does not include a change for purposes of recharacterizing “§ 471 costs” as “additional § 263A costs” (or vice versa ) under the simplified resale method or the simplified production method.

(2) Concurrent automatic changes . A motor vehicle dealership making an automatic change to one or both safe harbor methods described in section 5 of Rev. Proc. 2010–44 and another automatic change under § 263A for the same taxable year may file one Form 3115 to make both changes, provided the dealership enters the designated automatic change numbers for all such changes in Part I on that Form 3115, and complies with the ordering rules of § 1.263A–7(b)(2). See section 6.03(1)(b) of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, for information on making concurrent changes.

(3) Multiple adjustments . In the event that a motor vehicle dealership is taking into account a § 481(a) adjustment from another accounting method change in addition to the § 481(a) adjustment required by a change to a safe harbor method described in section 5 of Rev. Proc. 2010– 44, the § 481(a) adjustments must be taken into account separately. For example, a motor vehicle dealership that changed to comply with § 263A in 2009 and was required to take its § 481(a) adjustment into account over four years must continue to take into account that adjustment over the remainder of that four year § 481(a) adjustment period even though the dealership changed to a safe harbor method described in section 5 of Rev. Proc. 2010–44 in 2010 and has an additional § 481(a) adjustment required by that change.

(4) Designated automatic accounting method change numbers . The designated automatic accounting method change number for a change to treat certain sales facilities as retail sales facilities as described in section 5.01 of Rev. Proc. 2010–44 is “150.” The designated auto

matic accounting method change number for a change to be treated as a reseller without production activities as described in section 5.02 of Rev. Proc. 2010–44 is “151.”

(5) Contact information . For further information regarding a change under this section, contact Neville R. Jiang at (202) 317-7007 (not a toll-free number). .08 Change to not apply § 263A to one or more plants removed from the list of plants that have a preproductive period in excess of 2 years .

(1) Description of change . This change, as described in Rev. Proc. 2013– 20, 2013–14 I.R.B. 744, applies to a taxpayer that is not a corporation, partnership, or tax shelter required to use an accrual method of accounting under § 447 or § 448(a)(3), and either (a) wants to not apply § 263A, pursuant to § 263A(d)(1) and § 1.263A–4(a)(2), to the production of one or more plants that the IRS and the Treasury Department have removed from the list of plants that have a nationwide weighted average preproductive period in excess of 2 years, or (b) properly elected, pursuant to § 263A(d)(3) and § 1.263A– 4(d), to not apply § 263A to the production of a plant or plants that have been removed from the list of plants that have a nationwide weighted average preproductive period in excess of 2 years, and wishes to revoke its § 263A(d)(3) election with respect to those plants. See Notice 2013–18, 2013–14 I.R.B. 742, or its successor.

(2) Certain eligibility rule temporarily inapplicable . The eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, does not apply to a taxpayer that wants to make the change for its first or second taxable year ending after February 15, 2013.

(3) Audit protection . If a taxpayer currently does not apply § 263A to its blackberry, raspberry, or papaya plants in a manner that complies with the requirements of § 263A(d)(1) and § 1.263A– 4(a)(2), the IRS will not raise such method of accounting for a taxable year that ends on or before February 15, 2013. Also, if the use of such a method of accounting by a taxpayer is an issue under consideration (within the meaning of section 3.08 of Rev. Proc. 2015–13) for taxable years in examination, before an Appeals office, or

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before the U.S. Tax Court in a taxable year that ends on or before February 15, 2013, the IRS will not further pursue that issue.

(4) Manner of making change . A change under this section 11.08 is made with any necessary adjustments under § 481(a). For example, the revocation of an election under § 263A(d)(3) results in a § 481(a) adjustment that must take into account the change in depreciation from the alternative depreciation system to the general depreciation system included within such revocation.

(5) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 11.08 is “181.” (6) Contact information . For further information regarding a change under this section, contact Patrick M. Clinton at (202) 317-7005 (not a toll-free number).

.09 Change to a reasonable allocation method described in § 1.263A–1(f)(4) for self-constructed assets .

(1) Description of change . (a) Applicability . This change, as described in Rev. Proc. 2014–16, 2014–9 I.R.B. 606, applies to a producer (as defined in section 11.01(3)(d) of this revenue procedure) or a reseller-producer (as defined in section 11.01(3)(e) of this revenue procedure) that wants to change to a reasonable allocation method within the meaning of § 1.263A–1(f)(4), other than the methods specifically described in § 1.263A–1(f)(2) or (3), for selfconstructed assets produced during the taxable year, including any necessary changes in the identification of costs subject to § 263A that will be accounted for using the proposed method. This section 11.09 also includes a change from not capitalizing a cost subject to § 263A to capitalizing that cost for a producer or reseller-producer under a reasonable allocation method within the meaning of § 1.263A–1(f)(4) that the producer or reseller-producer is already using for selfconstructed assets, other than the methods specifically described in § 1.263A–1(f)(2) or (3). See section 11.02 of this revenue procedure for a producer or resellerproducer that wants to change to a method described in § 1.263A–1(f)(2) or (3).

(b) Inapplicability . This change does not apply to an allocation method based on the number of units produced or an allocation method that does not allocate costs to the units of property produced. This change does not apply to a change described in another section of this revenue procedure or in other guidance published in the Internal Revenue Bulletin. For example, this change does not apply to a change described in section 11.01 or 11.02 of this revenue procedure.

(2) No ruling on reasonableness of method . The consent granted in section 9 of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, for this change is not a determination by the Commissioner that the taxpayer is using a reasonable allocation method for costs subject to § 263A and does not create any presumption that the proposed allocation method is permissible. The director will ascertain whether the taxpayer’s allocation method is reasonable within the meaning of § 1.263A–1(f)(4).

(3) Multiple changes . A taxpayer making both this change and another change in method of accounting under section 10.11 of this revenue procedure for the same year of change must comply with the ordering rules of § 1.263A–7(b)(2).

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 11.09 is “194.” (5) Contact information . For further information regarding a change under this section, contact Christopher W. Call at (202) 317-7007 (not a toll-free number).

.10 Real property acquired through foreclosure .

(1) Applicability . This change, as described in Rev. Proc. 2014–16, 2014–9 I.R.B. 606, applies to a taxpayer that capitalizes costs under § 263A(b)(2) and § 1.263A–3(a)(1) to real property acquired through foreclosure, or similar transaction, where the taxpayer wants to change its method of accounting to an otherwise permissible method of accounting under which the acquisition and holding costs for real property acquired through foreclosure, or similar transaction, are not capitalized under § 263A(b)(2) and § 1.263A–3(a)(1). To

qualify for this change in method of accounting, a taxpayer must:

(a) originate, or acquire and hold for investment, loans that are secured by real property; and

(b) acquire the real property that secures the loans at a foreclosure sale, by deed in lieu of foreclosure, or in another similar transaction.

(2) Inapplicability . This change does not apply to costs capitalized under § 263A(b)(1) and § 1.263A–2(a)(1) by the taxpayer to the acquired real property as a result of production activities.

(3) Certain eligibility rule temporarily inapplicable . The eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, does not apply to a taxpayer that makes this change for its first or second taxable year ending after December 31, 2012.

(4) Designated automatic accounting method change numbers . The designated automatic accounting method change number for a change under this section 11.10 is “195.” (5) Contact information . For further information regarding a change under this section, contact Roy Hirschhorn at (202) 317-7007 (not a toll-free number). . 11 Sales-Based Royalties. (1) Description of change. This change, as described in Rev. Proc. 2014– 33, 2014–22 I.R.B. 1060, applies to a taxpayer that wants to change its method of accounting for sales-based royalties (as described in § 1.263A–1(e)(3)(ii)(U)( 2 )) that are properly allocable to inventory property:

(a) From not capitalizing sales-based royalties to capitalizing these costs and allocating them entirely to cost of goods sold under a taxpayer’s method of accounting;

(b) From not capitalizing sales-based royalties to capitalizing these costs and allocating them to inventory property under a taxpayer’s method of accounting;

(c) From capitalizing sales-based royalties and allocating these costs to inventory property to allocating them entirely to cost of goods sold; or

(d) From capitalizing sales-based royalties and allocating these costs entirely to cost of goods sold to allocating them to inventory property.

(2) Limitations.

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(a) A taxpayer may not make a change in method of accounting under this section 11.11 if the taxpayer wants to change to capitalizing sales-based royalties and allocating them to inventory property using an other reasonable allocation method within the meaning of § 1.263A–1(f)(4).

(b) A taxpayer making the changes described in section 11.11(1)(a) or 11.11(1)(c) of this revenue procedure that uses a simplified method to determine the additional § 263A costs allocable to inventory property on hand at year end must remove sales-based royalties allocated to cost of goods sold from the formulas used to allocate additional § 263A costs to ending inventory in the same manner that the taxpayer included these amounts in the formulas.

(c) A taxpayer making a change in method of accounting under this section 11.11 that uses a simplified method with an historic absorption ratio election (see §§ 1.263A–2(b)(4) and 1.263A–3(d)(4)) and currently includes, or is changing its method to include, sales-based royalties in any part of its historic absorption ratio must revise its previous and current historic absorption ratios. To revise its historic absorption ratios, the taxpayer must apply its proposed method of accounting during the test period, during all recomputation years, and during all updated test periods to determine the § 471 costs and additional § 263A costs that were incurred. The revised historic absorption ratios must be used to revalue beginning inventory and must be accounted for in the taxpayer’s § 481(a) adjustment. The taxpayer must use a method described in § 1.263A–7(c) to revalue beginning inventory.

changes on the appropriate line on the Form 3115 and complies with the ordering rules of § 1.263A–7(b)(2). See section 6.03(1)(b) of Rev. Proc. 2015–13 for information on making concurrent changes.

(5) Designated automatic accounting method change number . The designated automatic accounting method change number for changes in method of accounting under this section 11.11 is “201.”

(6) Contact information . For further information regarding a change under this section, contact John Roman Faron at (202) 317-7005 (not a toll-free number).

.12 Treatment of Sales-Based Vendor Chargebacks under a Simplified Method .

(1) Description of change. This change, as described in Rev. Proc. 2014– 33, 2014–22 I.R.B. 1060, applies to a taxpayer that wants to change its method of accounting to no longer include cost adjustments for sales-based vendor chargebacks described in § 1.471–3(e)(1) in the formulas used to allocate additional § 263A costs to ending inventory under a simplified method.

(2) Limitations . (a) A taxpayer making this change that uses a simplified method to determine the additional § 263A costs allocable to inventory property on hand at year end must remove sales-based vendor chargebacks from the formulas used to allocate additional § 263A costs to ending inventory in the same manner that the taxpayer included these amounts in the formulas.

(b) A taxpayer making a change in method of accounting under this section 11.12 that uses a simplified method with an historic absorption ratio election (see §§ 1.263A–2(b)(4) and 1.263A–3(d)(4)) and currently includes sales-based vendor chargebacks in any part of its historic absorption ratio must revise its previous and current historic absorption ratio(s). To revise its historic absorption ratios, the taxpayer must apply its proposed method of accounting during the test period, during all recomputation years, and during all updated test periods to determine the § 471 costs and additional § 263A costs that were incurred. The revised historic absorption ratios must be used to revalue beginning inventory and must be accounted for in the taxpayer’s § 481(a) adjustment. The taxpayer must use a

method described in § 1.263A–7(c) to revalue beginning inventory.

(3) Certain eligibility rule temporarily inapplicable . The eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, does not apply to this change for a taxpayer’s first and second taxable years ending on or after January 13, 2014. (4) Concurrent automatic changes . A taxpayer making both this change and one or more automatic changes under § 263A, or both this change and the change described in section 21.15 of this revenue procedure for the same taxable year of change may file a single Form 3115 for both changes, provided the taxpayer enters the designated automatic change numbers for all changes on the appropriate line on the Form 3115 and complies with the ordering rules of § 1.263A– 7(b)(2). See section 6.03(1)(b) of Rev. Proc. 2015–13 for information on making concurrent changes.

(6) Contact information . For further information regarding a change under this section, contact John Roman Faron at (202) 317-7005 (not a toll-free number).

.13 U.S. ratio method . (1) Change to the U.S. ratio method . (a) Description of change . This change applies to a foreign person, as defined in Notice 88–104, 1988–2 C.B. 443, as modified by Notice 89–67, 1989–1 C.B. 723, that is required to capitalize costs under § 263A and wants to change its method of accounting to the U.S. ratio method, as described in Notice 88–104.

(b) Manner of making change . A taxpayer requesting a change on behalf of a foreign person under section 11.13(1) of this revenue procedure must attach a statement to the Form 3115 providing the following information:

(i) Foreign person requirement . A representation that the foreign person is a qualified business unit (QBU), as defined in § 1.989(a)–1(b), of a foreign person, or the foreign branch of a U.S. person that constitutes a separate QBU, within the meaning of Notice 88–104. If the taxpayer is requesting a change in method of

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accounting on behalf of multiple foreign persons, please provide a representation that each foreign person is a QBU, as defined in § 1.989(a)–1(b), of a foreign person or the foreign branch of a U.S. person that constitutes a separate QBU, within the meaning of Notice 88–104;

(ii) Description of trade or business . The name and employer identification number (if applicable) for each foreign person and an explanation of each trade or business, as defined in § 1.446–1(d), for which a request to change to the U.S. ratio method is being made under this section 11.13(1); (iii) Applicable U.S. trade or business requirement . The identity of the “applicable U.S. trade or business,” as defined in Notice 88–104, that the foreign person wishes to use and an explanation of how this U.S. trade or business is “the same as, or most similar to” the trade or business conducted by the foreign person. If the taxpayer is requesting a change in method of accounting for multiple foreign persons, the taxpayer must identify the “applicable U.S. trade or business” for each foreign person, and explain how the respective U.S. trade or business is “the same as, or most similar to” the trade or business conducted by the foreign person; and

(iv) Relationship requirement . An explanation of how the “applicable U.S. trade or business” identified in section 11.13(1)(b)(iii) of this revenue procedure is a trade or business conducted in the United States by a “related person,” as defined in Notice 88–104, with respect to the foreign person requesting a change under this section. If the taxpayer is requesting a change in method of accounting for multiple foreign persons, the taxpayer must explain how the “applicable U.S. trade or business” identified in section 11.13(1)(b)(iii) of this revenue procedure is a trade or business conducted in the United States by “related person” for purposes of Notice 88–104 for each foreign person requesting a change in method of accounting. Use §§ 267(b) or 707(b), as applicable, to explain the relationship.

(c) Additional requirements . (i) A foreign person must continue to use the U.S. ratio of the applicable U.S. trade or business identified in section

11.13(1)(b)(iii) of this revenue procedure unless consent of the Commissioner is obtained to use the U.S. ratio of a different applicable U.S. trade or business under § 446(e) (see section 11.13(2) of this revenue procedure);

(ii) In the case of a controlled foreign corporation, the controlling U.S. shareholder, or in the case of a foreign branch of a U.S. person, the U.S. person, must maintain records of the U.S. ratio used by each foreign person to calculate the additional § 263A costs capitalized to property produced and property acquired for resale for the year of change and for subsequent taxable years for each foreign person requesting a change in method of accounting under this section 11.13. In the case of a controlled foreign partnership, the U.S. partner must maintain records of the U.S. ratio used by each foreign person to calculate the additional § 263A costs capitalized to property produced and property acquired for resale for the year of change and for subsequent taxable years for each foreign person requesting a change in method of accounting under this section 11.13. (iii) The § 481(a) adjustment is computed in the manner provided in Notice 88–104; (iv) The U.S. ratio is determined, and the ratio is applied to the costs of property produced or property acquired for resale incurred by the foreign person, in accordance with Notice 88–104; and

(v) If any foreign person is unable to obtain a U.S. ratio from the applicable U.S. trade or business identified in section 11.13(2)(b)(iii) of this revenue procedure, or is otherwise no longer eligible to use the U.S. ratio method, the foreign person is no longer permitted to use the U.S. ratio method. However, the foreign person is not ineligible to use the U.S. ratio method if the foreign person is able to obtain a U.S. ratio from a different applicable U.S. trade or business, and changes the applicable U.S. trade or business pursuant to section 11.13(2) of this revenue procedure or under the non-automatic change procedures of this revenue procedure, as applicable. If a foreign person is no longer eligible to use the U.S. ratio method, it is required to change its method of accounting to a method that complies with §§ 263A and 471 using either the auto

matic change procedures of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, and sections 11.01, 11.02, or 11.09, as applicable, of this revenue procedure or the nonautomatic change procedures of Rev. Proc. 2015–13.

(2) Change within U.S. ratio method . This change applies to a foreign person currently using the U.S. ratio method that wants to use the U.S. ratio of a different applicable U.S. trade or business for purposes of applying the U.S. ratio method as described in section 11.13(2)(a) or 11.13(2)(b) of this revenue procedure. (a) Required change in the applicable U.S. trade or business .

(i) In general . A foreign person is permitted to change its method of accounting under this section 11.13(2)(a) to use the U.S. ratio of a different applicable U.S. trade or business, as defined in Notice 88–104, if the foreign person is no longer able to obtain the U.S. ratio from the applicable U.S. trade or business previously identified and if: (A) the U.S. person or related person in which the applicable U.S. trade or business is conducted terminates its existence; (B) the foreign person is no longer related, within the meaning of § 267(b) or § 707(b), to the U.S. person or related person in which the applicable U.S. trade or business is conducted; or (C) the U.S. person or related person ceases to conduct the applicable U.S. trade or business.

(ii) Certain eligibility rule inapplica- ble . The eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015–13 does not apply to the change described in section 11.13(2)(a) of this revenue procedure. (iii) Manner of making change . A foreign person making a change in method of accounting under this section 11.13(2)(a) must make the change in accordance with the requirement set forth in section 11.13(2)(c) of this revenue procedure. (b) Other changes in the applicable U.S. trade or business .

(i) In general . If the foreign person cannot make the change in method of accounting described in section 11.13(2)(a) of this revenue procedure, or there is more than one U.S. trade or business that can reasonably be considered the “same as, or most similar to” the foreign person’s trade or business, the foreign person is permitted to change its method of accounting

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under this section 11.13(2)(b) to use the U.S. ratio of a different applicable U.S. trade or business.

(ii) Manner of making change . A foreign person making a change in method of accounting under this section 11.13(2)(b) must make the change in accordance with the requirement set forth in section 11.13(2)(c) of this revenue procedure. (c) Short Form 3115 in lieu of a Form 3115 . In accordance with § 1.446– 1(e)(3)(ii), the requirement of § 1.446– 1(e)(3)(i) to file a Form 3115 is waived and pursuant to section 6.02(2) of Rev. Proc. 2015–13, a short Form 3115 is authorized for a change described in section 11.13(2)(a) or 11.13(2)(b) of this revenue procedure. The short Form 3115 must include the following information:

(i) the identification section of page 1 (above Part I);

(ii) the signature section at the bottom of page 1;

(iii) Part I, line 1(a); (iv) the information required under section 11.13(1)(b) of this revenue procedure; and

(v) a statement that the change in method of accounting is made under section 11.13(2)(a) or 11.13(2)(b) of Rev. Proc. 2015–14, as applicable.

(3) Designated automatic accounting method change numbers . The designated automatic accounting method change number for a change under this section 11.13 is “214.” (4) Contact information . For further information regarding a change under this section, contact Karla M. Meola, at (202) 317-7005 (not a toll-free number). .14 Depletion . (1) Description of change. This change applies to a taxpayer that wants to change its method of accounting for depletion to treat these amounts as an indirect cost that is only properly allocable to property that has been sold (that is, for purposes of determining gain or loss on the sale of the property) under § 1.263A–1(e)(3)(ii)(J).

(2) Limitation. (a) A taxpayer making this change in method of accounting that uses a simplified method to determine the additional § 263A costs allocable to inventory property on hand at year end must remove depletion allocated to cost of goods sold from the formulas used to allocate addi

tional § 263A costs to ending inventory in the same manner that the taxpayer included these amounts in the formulas.

(b) A taxpayer making this change in method of accounting that uses a simplified method with an historic absorption ratio election (see §§ 1.263A–2(b)(4) and 1.263A–3(d)(4)) and currently includes depletion in any part of its historic absorption ratio must revise its previous and current historic absorption ratios. To revise its historic absorption ratios, the taxpayer must apply its proposed method of accounting during the test period, during all recomputation years, and during all updated test periods to determine the § 471 costs and additional § 263A costs that were incurred. The revised historic absorption ratios must be used to revalue beginning inventory and must be accounted for in the taxpayer’s § 481(a) adjustment. The taxpayer must use a method described in § 1.263A–7(c) to revalue beginning inventory

(3) Certain eligibility rule inapplica- ble. The eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, does not apply to this change.

(4) Concurrent automatic changes . A taxpayer making both this change and another automatic change under § 263A for the same year of change may file a single Form 3115 for both changes, provided the taxpayer enters the designated automatic change numbers for both changes on the appropriate line on that Form 3115 and complies with the ordering rules of § 1.263A–7(b)(2). See section 6.03(1)(b) of Rev. Proc. 2015–13 for information on making concurrent changes.

(5) Designated automatic accounting method change number. The designated automatic accounting method change number for a change in method of accounting under this section 11.14 is “215.”

(6) Contact information. For further information regarding a change under this section, contact John Roman Faron at (202) 317-7005 (not a toll-free number).